Mark and I have made no secret of our investing in a technology incubator. We first mentioned why we like incubators, we then interviewed founder and tech wonk Dan Faiman, and recently I spoke with Donald Danks, who is a partner in the firm and an integral part of management to speak to us about some of his prior successes and general philosophy.
We believe management to be the single most important factor to consider when investing in any business. Don is one of the key reasons we feel comfortable investing in the incubator project.
Below are his thoughts on some questions I posed him. I hope you enjoy his insights as much as I enjoyed talking with him.
Chris: Don you've had a long and successful career creating, developing, funding, managing and growing early stage companies. Was this a considered approach or did you "fall into" the entrepreneurial space?
Don: It is in my DNA. I formed a 4th Grade basketball league when I was ten years old in Las Vegas, Nevada. I put together a team, but had no opponents, so I rallied other elementary schools to raise money, buy uniforms and recruit a coach. A four team league, we played four games, each team ended up with enough money to go to A&W after each game, so our 1967 inaugural season was a success.
So, since then I have started and built companies of all sorts, shapes and sizes, and along the way learned that, much like our undefeated fourth grade basketball team, it is about getting brilliant, motivated, risk takers to let go of their ego and become part of a team that can achieve success in building a business.
Chris: Yes, I can't agree more on the ego statement. I've seen many a good idea spoiled by egos. You have had some really successful ventures such as co-founding iMergent, growing revenues to more than $150 million and ultimately taking it public as a $400 million company. Among other ventures you also led the restructuring and funding of Headwaters Inc (HW:NYSE) in '98. Can you tell us a little about those experiences?
Don: The businesses may be different, but what you focus on is always the same. It starts with people. The projects that attract me are projects with smart, motivated, selfless people. And if the people I invest in seem to meet my criteria, but over time come up short, I never hesitate to instigate the removal of a team member whose interests, work ethic, commitment, etc. are not aligned with the rest of the team.
I've learned over 30 years how to do this effectively and it is one of the most important elements of managing a start-up - if the team isn't right, you're doomed. So I focus on management first, and continually adjusting the team to meet the needs of the company at any particular stage of development.
With iMergent, we started with one team that burned through $40 million in an attempt to build an ecommerce software company. When they failed, I worked to move them out, promoted the people in the company who were interested in building a business, not just collecting a paycheck, and with less than $1 million of new capital, we went on to generate more than $100 million in cash over a six year period.
I am also focused on the business model - is it scalable? Do we have a large defined niche with sustainable competitive advantages, that sort of thing. But I've learned that business models change to meet the demands of the market and it is the nimbleness and commitment of the management team to meet the needs of the market and not their ego, that determines success.
At iMergent, Headwaters and Auxilio, the management teams went through many changes, ended up with the right chemistry and constantly evolved the business models to meet market demand. They all are, have been and will continue to be, viable companies. Of course, I focus on staying with a company until my venture investors have substantial liquidity events and I make my exit when long term operators are required.
Chris: According to the National Venture Capital Association, 11% of private sector jobs come from venture backed companies and venture backed revenue accounts for 21% of US GDP. You've been involved for the last 3 decades, what changes have you seen taking place in the private equity markets?
Don: From my experience, over the past several years venture investors are far more selective, diligence oriented, more risk averse and focused on time proximity to cash generation more than ever. There is still private equity for ideas, but management is still the number one criteria. A track record, or proof of competence and performance is paramount in order to get capital at any valuation.
I have invested in less than the perfect business model with stellar, experienced management, knowing that they have the skill sets to stay at the process knowing that they will evolve their business. Venture investors demand low fixed operating expenses and you have to convince them that the revenue models are realistic and will yield cash within a reasonable amount of time.
Chris: A disproportionate amount of private equity appears to be channeled into the "knowledge economy". Why do you think this is?
Don: It's all about exploiting the massive leverage inherent in the knowledge economy. The Internet has quickly evolved into a platform that makes access to everything easier, cheaper, faster, more relevant - and if you have a business model that can exploit that reality, and back it up with a good team, cash is easy to attract.
Chris: Identifying strong contenders in the start-up phase is clearly one of your skills. Given that there are so many companies seeking financing and eagerly seeking out people such as yourself to sit on their boards, what has driven you to your deep involvement with Fanattac and now Archetype?
Don: My diligence is focused on management and their inherent drive to abandon ego, fully invest themselves, surround themselves with equity partners willing to make and take similar commitments, and investment of their time and resources. When you have that, you can just about ensure success in a start-up.
Start-ups fail because founders quit. It's that simple. If you don't quit and keep battling with right thinking and a trusted team, you can get to success eventually. That sounded like a cliché but it is the essence of a start-up - you have to be willing to do what people who fail don't - and that's not to quit.
Change your business model, get rid of dead weight, adjust your valuation of capital, move into a studio apartment, eat noodles if you have to, but don't quit. People who get that are the ones who win.
Chris: What do you think the advantages of an incubator setup are over a traditional tech start-up?
Don: We have created the leverage to build a number of start-ups for less than it would normally cost to start even one new company. It's about the human resources in our group. With the team we have, and the nature of the tech development now, it is easy to spread risk across a number of projects and allow the best ones to bloom.
Archetype works because we have a team that meets all of the criteria I described earlier - and EVERYONE is invested in the equity of all of Archetype's projects. There are no paycheck people. The group has every skill set required to usher a project from idea to implementation and creating a portfolio of opportunities that gives us an opportunity to take more risks with less capital and expand the upside. This will only work because of the people involved and their commitment to the process.
Talking with Don is a breath of fresh air for me, and frankly he is one of the reasons Mark and I believe we have a decent shot at a multiple on our money when investing in the projects he is involved with.
- Chris"The most difficult thing is the decision to act, the rest is merely tenacity. The fears are paper tigers. You can do anything you decide to do. You can act to change and control your life; and the procedure , the process is its own reward." ~ Amelia Earhart